Trading

In document How the e-cbot Market Works (Page 9-15)

Market Operations

Market Operations ensures that a fair and orderly market is maintained at all times and is the trader’s daily point of contact with the exchange. Its team of staff specialists deal with specific product areas.

Functional Member Readiness (FMR)

Functional Member Readiness is primarily responsible for providing customer assistance with regard to client connectivity to the e-cbot platform. Contact details for FMR can be found on the e-cbot web site (www.cbot/ecbot), or by calling 312-341-7922.

Anonymity

Trading anonymity is a key aspect of the e-cbot market. Participants in the market will not be aware of whose orders they are viewing or are trading against, either before or after a trade until the trade has cleared.

System Configuration

Regardless of whether a trader or firm chooses to develop a private trading application or use a solution provided by an ISV, the method by which the trading application communicates with the

e-cbot system is through the LIFFE CONNECT®API. This is described in detail in the e-cbot Reference Manual, copies of which may be requested from fmr@cbot.com or by contacting FMR at 312-341-7922.

Trade Matching Priority

The trading host configuration allows trade matching algorithms to be set by contract using one of the following algorithms.

Price and time priority

Price: The highest bid or lowest offer has priority over orders in the same contract month, spread, or option strike.

Time: The first order at a price has priority over all other orders at the same price which will, in turn, trade according to the time they were accepted by the trading host.

Price and pro-rata priority

Price: The highest bid or lowest offer has priority over orders in the same contract month, spread, or option strike.

Pro-rata: When all orders at a price have the same priority, orders are filled in proportion to volume.

The Pro-Rata Algorithms

Five variations of the pro-rata algorithm are available:

• vanilla pro-rata (with priority functionality disabled)

• pro-rata with priority order and no volume cap or minimum volume

• pro-rata with priority order and a volume cap

• pro-rata with priority order and a minimum volume requirement

• pro-rata with a priority order, a volume cap, and a minimum volume requirement

Vanilla Pro-Rata Algorithm

The vanilla pro-rata algorithm divides incoming orders at a given price in proportion to the volumes specified on the resting orders at that price. This contrasts with the price and time algorithm which allocates volume on a first come, first served basis.

Pro-Rata Algorithm with Priority Order

The pro-rata algorithm with priority order differs from the vanilla pro-rata algorithm by allowing one order on each side of the market to be assigned a priority flag. Once an incoming order has traded against the priority order, the pro-rata function operates in the normal fashion. This mechanism should encourage traders to improve prices by rewarding price improvement with volume.

An order will gain priority status if it creates a price improvement in a market as it enters the order book. Only one order in a particular market can have priority status at any one time. As a result, priority status will be passed to an order that creates a price improvement prior to the filling of the order that had previously held priority status.

Given these orders:

Trader 1 December Sell 100 contracts 10:01 a.m.

10-year T-note @ 111-03 futures

Trader 2 December Sell 20 contracts 10:02 a.m.

10-year T-note @ 111-03 futures

Trader 3 December Sell 80 contracts 10:03 a.m.

10-year T-note @ 111-03 futures

A new bid of 111-03 for 110 contracts will be allocated in this way using a vanilla pro-rata algorithm:

Trader 1 sells 55 contracts

Trader 2 sells 11 contracts

Trader 3 sells 44 contracts

Example

#1

There will not always be a priority order. For example, when the priority order is fully traded, there could still be other unfilled orders at the same or worse price.

Given these orders:

Trader 1 December Sell 100 contracts 10:01 a.m.

10-year T-note @ 111-03 (Priority)

futures

Trader 2 December Sell 20 contracts 10:02 a.m.

10-year T-note @ 111-03 futures

Trader 3 December Sell 80 contracts 10:03 a.m.

10-year T-note @ 111-03 futures

In this case, the order of Trader 1 is assigned priority because this order created the price improvement. A new bid of 111-03 for 110 contracts will be allocated in this way using a pro-rata algorithm with priority order:

Trader 1 sells 100 contracts (priority)

Trader 2 sells 2 contracts

Trader 3 sells 8 contracts

Example

#2

Pro-Rata with Priority Order and a Volume Cap

In order to prevent a priority order from locking a particular market, a volume cap is available within the algorithm. It is possible to specify two volume cap values for each contract, one for outright markets and one for spread markets. These values represent the amount of the volume to which priority will be assigned. Once the volume cap has been hit, the algorithm distributes any unassigned volume remaining in the incoming order in the normal pro-rata manner. Because of this, the priority

Given these orders:

Trader 1 December Sell 100 contracts 10:01 a.m.

10-year T-note @ 111-03 (Priority)

futures

Trader 2 December Sell 20 contracts 10:02 a.m.

10-year T-note @ 111-03 futures

Trader 3 December Sell 80 contracts 10:03 a.m.

10-year T-note @ 111-03 futures

Because Trader 1 has made the new best price, this order has been assigned priority. However, note that a volume cap of 50 lots is in operation.

A new bid of 111-03 for 110 contracts will be allocated in this way under the pro-rata algorithm with priority order and a volume cap:

Trader 1 sells 70 contracts (50 priority + 20 pro-rata)

Trader 2 sells 8 contracts

Trader 3 sells 32 contracts

Example

#3

Pro-Rata Algorithm with Priority Order, a Minimum Volume Requirement, and a Maximum Volume Cap In order to prevent small orders from taking priority over large volume orders, a minimum volume parameter can be specified. As with the volume cap, this is configurable on a per contract basis with separate values being available for outright and spread markets. A side effect of a minimum volume parameter is that it can result in situations where the best price in a market is not provided by the priority order.

Given these orders:

Trader 1 December Sell 100 contracts 10:01 a.m.

10-year T-note @ 111-03 (Priority)

futures

Trader 2 December Sell 20 contracts 10:02 a.m.

10-year T-note @ 111-03 futures

Trader 3 December Sell 80 contracts 10:03 a.m.

10-year T-note @ 111-03 futures

Because Trader 1 has made the new best price, and the order meets the 20 contract minimum volume requirement, this order has been assigned priority status.

A new sell order arrives

Trader 4 December Sell 10 contracts 10:05 a.m.

10-year T-note @ 111-02 futures

Although Trader 4 has made a new best price, this order for 10 contracts does not meet the 20 contract minimum volume requirement, so a new bid of 111-03 for 110 contracts will be allocated in this way under a pro-rata algorithm with priority order, a 20 contract minimum volume requirement , and a 50 contract maximum volume requirement:

Trader 1 sells 67 contracts (50 priority + 17 pro-rata)

Trader 2 sells 7 contracts

Trader 3 sells 26 contracts

Trader 4 sells 10 contracts

Example

#4

In document How the e-cbot Market Works (Page 9-15)